How to Set Up a Qualified Annuity

A qualified annuity is a contract with an insurance company through your employer, that you fund with pretax dollars. The company promises to pay a certain income to you for a designated amount of time. There are many choices available, so do your homework to find the best one for you and your family.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Funds to pay premiums

Set Up a Qualified Annuity

1. Ask your employer about whether or not you can set up the annuity directly through the company. Some companies will direct you to an outside insurance company.

2. Fund your qualified annuity with a single payment if you have money from a retirement account or other source.

3. Select a fixed annuity if you want the security of a guaranteed rate on your return. You will receive a specific rate for a designated period of time, per your contract.

4. Set up a variable annuity if you aren't afraid of risk. These annuities offer a high rate of return when the market is prospering and decrease in value when the market is faltering.

5. Choose a flexible-premium annuity if you are unsure of the amount of money you will have available. This may also be a good choice if you have money coming out for other investments.

6. Pick a fixed-period annuity if you are not looking for lifetime income. This annuity will allow you to determine the number of years of payments.

7. Attempt to purchase a stretch or legacy annuity. After the death of the annuitant, the beneficiary can take advantage of the tax-deferred status of the original annuity.

8. Plan your payments so that you will live comfortably when your retirement begins. You have the choice of getting a lump-sum payment, taking payments for a fixed period of time or taking lifetime payments.

9. Start a joint annuity with your spouse, a close friend or a relative. After the death of one of the joint owners, in most cases, the other owner will be able to maintain the annuity.

Tips & Warnings

• Keep your annuity until you are 59 1/2 years old and save the 10-percent federal penalty you would have to pay for early surrender.
• Do not forget to name a beneficiary when you set up your annuity, to prevent the remainder of the principle you paid reverting to the insurance company at the time of death.
• There are fees associated with most changes made to an annuity once you have set it up and started making premium payments. Ask your insurance representative for details if you are thinking about making any changes or withdrawals.